Taking effect February 15th are several rules announced by the Department of Finance Canada in December of 2015. While these changes had been expected for some time, the December announcement began the process of analysis to determine what impact the final version of the rules would have on the economy. After two months to evaluate the changes, commentators are looking to the housing market in Calgary as one of the regions to feel the effect of these rules the most. In particular, the change in down payment requirements for homeowners seeking government-backed mortgage insurance on high ratio home loans.

Prior to the December rules change, homeowners seeking a high loan-to-value ratio mortgage could still qualify for government-backed mortgage insurance while making a down payment of only 5% on mortgages of up to $1,000,000. This purchase investment fell well below that required for a standard 20% down payment mortgage. Hoping to reduce the amount of risk assumed by taxpayers by these high-ratio purchasers and bring greater stability to the residential real estate market, the Department of Finance will now require the top echelon of high-ratio purchasers seeking government-backed mortgage insurance to have more skin in the game.

Beginning with loan applications filed after February 15th, in order for loan amounts between $500,000 and $1,000,000 to be covered by government-backed mortgage insurance, the home purchaser will be required to make a 10% down payment. This new rule splits the down payment requirements, leaving a 5% minimum for loans of $500,000 and below but adding an extra 5% for the amounts above the $500,000 mark. High-ratio loans in excess of $1,000,000 remain ineligible for government-backed mortgage insurance.

The net effect of the new down payment measure will be a maximum increased down payment of 7.5% of the total loan amount for loans at the top of the range of insurability. After February 15th, a $1,000,000 home purchase that previously required a down payment of $50,000 in order to qualify for government-backed mortgage insurance will be on hold until the purchasers can raise an additional $25,000. For homeowners with a loan application already on file by the February 15th deadline, their loan must be issued by July 1st or additional funds will need to be produced.

The Department of Finance has openly acknowledge that the short-term effect of this rule change will be a slow down in home sales as prospective home purchasers pause to save additional capital. Nonetheless, the government is willing to accept this slow down in hopes of seeing a stronger housing market in the future.

In Calgary, that stable future may take quite a while to materialize. Hit by downturns in major industries as well as a higher than average unemployment rate, Calgary is also a major market for housing in the $400,000 to $700,000 range. In the Calgary region, it can be expected that the new down payment requirements will force sellers to price more houses at $500,000 and below, or delay closing as they wait for prospective buyers to raise additional cash. Analysts following the housing market can expect to see the impact of the new rules beginning in late February and early March. Another peak can be expected in July as the closing deadline for current loan applications passes.

It is often said that gain requires pain, with the implementation of this new down payment rule let us hope that the pain is short lived and the gain worthwhile.